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Background and scale of insourcing opportunity in Wales. Strengths and weaknesses of insourcing decision-making in Wales

In comparison to the position in England, public bodies in Wales have not historically embraced outsourcing to the same degree as their English counterparts. Wales is therefore starting from a baseline of less outsourced services to potentially return to a strengthened Welsh public sector. This is in part a reflection that despite a UK-wide shift towards increased marketisation and fragmentation of public services from the 1980s onwards, Wales has consistently maintained a stronger focus on public value and the importance of the public service ethos.

Due to the fragmented nature of reporting and classification it is difficult to provide an accurate quantification of the scale of outsourcing by service area. Published reports (Government outsourcing – when and how to bring public services back into government hands. Institute for Government, 2020) on UK-wide data suggest that just over a quarter of the money spent on adult social care goes on in-house providers, with the figure being considerably higher for children’s social care.

42% of UK-wide waste collection budgets were spent with outsourced providers in 2018/19.

A 2013 National Audit Office report (The role of major contractors in the delivery of public services. National Audit Office, 2013) stated that 4 large contractors (Atos, Capita, G4S and Serco) accounted for a significant proportion of outsourcing in the UK across all public services. Examining the Atamis spend data for the Welsh public sector reveals that spending with these firms in Wales was £43 million in 2018/19 and £30 million in 2019/21 (note that this analysis is based on matching supplier names, not a complete analysis of beneficial ownership across all suppliers).

Based on our stakeholder engagement, currently outsourced services with the most potential to insource are:

  • Facilities management
  • Catering
  • ICT
  • Leisure
  • Social care

Within these, there are specific issues and nuances which should be considered. In relation to catering, a key barrier to insourcing is concern about the internal capacity of individual public sector organisations to navigate the complex regulatory regimes and auditing requirements relevant to food preparation and service. However, this capacity is likely to exist, particularly within local authorities, suggesting that a more creative partnership approach across Public Service Board partners could unlock opportunities to insource. Catering is also a good example of where some outsourcing decisions are made because the outsourced provision provides a valuable and ongoing income generation opportunity. For example, franchised café facilities on public estates can provide ongoing revenue streams without the risks associated with insourced provision. This suggests a need to consider how the funding regimes for different parts of the Welsh public sector can strike a different balance and incentivise activity which delivers a broader societal benefit but at the expense of individual bodies’ balance sheets where there is a compelling case to do so.

Social care provision requires more nuanced consideration. There is a compelling case for removing profit from social care provision, and an existing commitment in the Programme for Government to do so in relation to services for children looked after. There is a compelling case to minimise the presence of extractive providers in local care markets. However, wholescale insourcing could undermine the valuable contribution of the third sector and democratically owned provision, which provides enhanced reach and reciprocity in communities and underpins the foundational economy approach. In CLES’ 2020 report (A progressive approach to adult social care. CLES, 2020) we suggest that a progressive approach to adult social care would represent a blend of provision encompassing:

  • Inhouse delivery: where the service is delivered by the local state. 
  • Municipal enterprise: arm’s length management organisations and mutually owned companies.
  • Worker ownership: cooperatives. 
  • Community ownership: community business, social enterprise and CICs. 
  • Local private ownership that supports a triple bottom line: namely, a concern for the wider community, the environment and workers, alongside the pursuit of profit.

However, it must be noted that without progressive legislation and financial mechanisms the generative potential of alternative models of provision (all but inhouse delivery) can be hampered by the influence of private equity capitalisation (the issue of capitalisation and alternative models of ownership in Wales has been discussed within CLES’s report ‘Owning the Workplace, Securing the Future’).

Whilst the numbers of contemporary considerations of insourcing in the Welsh public sector are relatively limited, several factors emerged from our discussions with Welsh public sector stakeholders. Firstly, the consideration to insource has tended to be a reactive, and not a proactive, one. This tends to be a pragmatic response to concerns about the current provision – for example, in relation to cost and value for money, workforce considerations, service quality, or market stability. Decision-making in relation to insourcing is therefore highly weighted to these factors, within the local context of the service in question.

What is missing is any sense of a more systematic consideration of the implication of local choices in relation to service models for the local economy or through the framing of the Well-being of Future Generations Act, or the inclusion and consideration of these factors within any decision-making process.

This suggests that the toolkit needs to:

  • make the case for insourcing, relating considerations of choice of service model to the public service missions of the different types of organisations to which the toolkit is aimed. For example, using the framing of local economic development, wellbeing, and the social determinants of health.
  • provide a prompt to encourage a more proactive and systematic consideration to insource.
  • provide a broader suite of evaluation criteria drawn from the wellbeing goals which increase the likelihood that workers in all parts of Wales can access fair work

Potential for alternative models of service provision

Some stakeholders expressed that there is a need to think creatively about how public sector spend can best support job creation, and guarded against a presumption that insourcing will, in every case, deliver the best employment outcomes. Hywel Dda University Health Board, for example, argued that contracting authorities should utilise the reliable, fixed cash flow from the public sector to maximise jobs benefit in local economies, including considering alternatives to a traditional insourcing approach. Here, they pointed to specialist supply chains that will likely never be insourced, such as orthopaedic surgery equipment, to make the case for progressive procurement practices.

Even for less specialised services there may be opportunities to consolidate demand across multiple public sector bodies (as already happens, for example in NHS Shared Services) and use this to stimulate new cooperative or social enterprise models of delivery where the combined demand from the Welsh public sector could enable them to compete for work outside of Wales, in so doing creating significant employment opportunities where they are most needed in Wales.

There are a number of alternative approaches, with their own benefits and limits, that a contracting authority could engage with to meet the broader policy aims around fair work, social justice, and wellbeing. These approaches have the aim of excluding profiteering activity within public service delivery, while supporting the inclusion of socially just enterprise:

Wholly owned company

This approach was taken by Stoke-Upon-Trent, with their wholly owned company Unitas. With the ability to operate commercially with public sector clients, providing an income stream for the local authority. Also receiving its mandate from the council’s political leadership, Unitas also made significant improvements to localising supply chains. However, the arm’s-length nature removes a degree of control of internal employment practices from council authorities.

Generative partnerships

This approach was championed by Hywel Dda University Health Board, who are developing plans on their catering services to be in collaboration with a locally rooted family-run business. This shows the potential for contracts to be a useful tool to channel reliable demand (public money) toward bolstering Welsh SMEs, in line with government policy commitments, albeit with a need to ensure that such models deliver against fair work objectives.

Promoting cooperatives and social enterprise

The Social Services and Well-being Act (Wales) 2014 includes provisions that include a responsibility for local authorities to promote social enterprises and cooperative organisations or arrangements to provide care, support and preventative services (Social Services and Well-being (Wales) Act 2014, Section 16). Meanwhile, Public-Common Partnerships (PCPs) offer new frameworks of institutional design that ensure shared governance and management of public assets (Public-Common Partnerships: Democratising ownership and urban development. Heron, K; Milburn, K; Russel, B., 2021. Common Wealth.). 

Social licensing

This approach entails establishing a social justice and wellbeing orientated criterium for contractors to meet to win public contracts and could ensure that public money is supporting generative economic activity. This could, for example, be inspired by NHS Wales Shared Services Partnership Procurement Strategy (NWSSP - PS) which ensures that procurement practice aims to “strive to deliver the goals of the Well-being of Future Generations (Wales) Act 2015 through a holistic approach to its procurement process” (Finance Committee Report on Community Wealth Building by reporting officer Huw Thomas, 26/01/2021. Hywel Dda University Health Board).

Capacity to deliver insourcing

If the potential for alternative models of service provision have been considered and the contracting authority has taken the decision to follow the insourcing route, there are several key considerations:

In the supplier market

We heard that it is important to manage insourcing strategy on risk, which is particularly relevant to providers in children’s social care. The insourcing authority must consider the event in which providers start to exit the market before the public sector can develop the capacity to pick it up, if they recognise that there is no future market for them. However, it is also important to recognise that contracting authorities may have limited ability to effectively manage contracts on their way to be insourced, as exhibited in the Derby City Council case study.

In the labour market

Stakeholders flagged issues with recruitment where services are insourced. This is related to difficulty attracting necessary expertise for specialisms like software development, but also to “rigid” terms and conditions meaning that they are less able to attract casual workers in some sectors like leisure services where casual work is sometimes necessary.

Internal capacity within public bodies

Several stakeholders pointed out that in-house services require significant back-office support “which is rarely factored into options appraisals”. For example, catering requires expert supplier management given the complex regulatory regimes around food – this capacity has been lost from public sector in many cases. (However, Welsh school catering may provide answers to this challenge through the partnership work they exhibit, where they work with their Local Authority to centralise back-office support).

Stakeholders from successful insourcing projects pointed out that once you have skills and ability to run an in-house service, it opens a door for further in-sourcing. This is a process whereupon pilots of smaller service areas can be undertaken to start developing capacity before engaging with larger service areas. As seen in Islington, these larger service areas can take up to two years, with significant effort and resource from across business areas, from planning to completion and the benefits accrued around service quality, integration and efficiency far outweigh the time, resource and effort that has been expended. This points to the need for a dynamic process, with the toolkit for the Welsh public sector encouraging ongoing review and reassessment.

After completion, insourcing can provide opportunities to release pressure on public body resource and improve efficiency in the medium and long term. This can include reducing capacity for contract management and monitoring, as well as increased opportunities for service integration and innovation. As seen in Wigan, insourcing drives have enabled the local authority to dissolve the boundaries around service specification which were necessary to outsourced contracts. In particular, they have driven the integration of social care and leisure services to improve the social care service offer. Neath Port Talbot have similar aspirations around the integration of their health services and leisure, ensuring the development of a healthier and more active local populace – easing pressure on resources in health services in the longer term. Given the explicit remit of Public Service Boards to coalesce around wellbeing objectives, there is ample opportunity for this way of working in Wales.

Workforce transfer considerations

Throughout our stakeholder engagement, all successful insourcing projects noted that trade union engagement was an enabler for the local authority to insource at pace and ensure success. One stakeholder noted that “those being insourced need to be empowered and not subject to a process”. Generally, workforces were engaged from the outset on pay and Ts & Cs alongside their evolving roles and responsibilities. This is crucial given that the need for integration between what can be wide disparities between the public and private sector, with the latter sometimes providing offers of bonus pay and more narrow job descriptions.

In addition, more successful projects, such as that in the Islington case study, saw the co-development of new training regimes to ensure maximum buy-in from the transferred workforce.

On workforce integration, insourcing authorities need to also consider any pre-existing equal pay agreements that could complicate industrial relations. For example, workers who are being insourced may expect a greater pay increase due to new expectations of service quality, which will have implications for pay across other service areas.